Do You Know What's In Your Mutual Funds?

Do you invest in stocks? Most people would say no; they say, “we only invest in mutual funds.” And for most people that answer is wrong. Or at the very least, dangerously misguided.

That’s because the mutual funds and ETFs that we invest in usually have most, or sometimes all, of their assets in stocks. It means that, while you personally may not be actively picking stocks, someone or some computer is. Those choices and how (un)diversified they are can give you an unexpected wallop when you can least afford it.

The good news is that by law, any single mutual fund (or a hedge fund, or anyone else for that matter) can’t own more than 5% of the stock of a single company without at least making a filing with the SEC. So, for example, your mutual fund is prohibited from owning more than 5% of the outstanding shares of, say, Lululemon. That means in the worst-case scenario, you won’t have more the 5% of your money in any one company. While even that concentration may be too much for some, for most of us that is adequate protection from an individual company imploding.

However, if you mix investments in individual stocks with owning mutual funds, or if you own a handful of similar mutual funds, you may not be as diversified as you think you are. And this could have dire consequences. For example, if you were unwittingly concentrated in the financial services industry in 2008 or the auto industry in 2009, your portfolio would have taken a wallop – even though you thought you were diversified by holding mutual funds.

The mutual fund companies have to file reports with the SEC’s EDGAR database that show their top holdings on a quarterly basis. However, instead of looking around in EDGAR, you can use Yahoo! Finance to input a mutual fund ticker and find out the top ten holdings, and the fund’s total assets across various industries. For example, you can see this data for the Fidelity Magellan fund. You can input other mutual fund tickers in the upper-right of the page.

You can collect this data for all of your mutual funds and put it into a spreadsheet program (like Microsoft Excel) to calculate your overall exposure for your portfolio – just remember that you must weight each fund by the percentage of your total assets that are in each fund. That way you can find out if you’re concentrated in a particular industry, or even a particular stock, even though you may own many different mutual funds.

John is the co-founder and CEO of Blueleaf and is an active startup advisor. He is also an experienced entrepreneur and senior executive. As part of 6 founding teams, he has led the product management, marketing, and finance functions. His background in banking and wealth management has shaped the vision for Blueleaf.

Jack JohnsonNovember 23, 2011, 8:52 pm

You state “So, for example, your mutual fund is prohibited from owning more than 5% of the outstanding shares of, say, Lululemon. That means in the worst-case scenario, you won’t have more the 5% of your money in any one company.” You then include a link to FMAGX which clearly shows the greatest concentration in AAPL making up 6.45%. Can you explain how 6.45% of this funds assets are concentrated in that one security yet your article states that worst-case-scenario is no greater than 5% concentration in any security. You do state ownership of more than 5% requires filing with SEC. That being the case, owning greater than 5% isn’t necessarily “prohibited” and owning on 5% is not the “worst-case-scenario”….

Your assertion is correct. It is possible for a fund to own more than 5% stake in company and it isn’t technically prohibited. It requires SEC filings to do it actively or it can happen passively as in the case in this example.

Thanks for the request that I clarify. There are several issues going on here.

1) Simplification – to keep the article short I omitted several details. a) Mutual Funds can make special filings with the SEC to continue purchasing shares above 5% if their charters allow. This rarely happens in practice however. b) there is no divestiture requirement if ownership above 5% happens as the result of appreciation. However, some mutual fund charters may explicitly deal with this situation.

2) Appreciation – AAPL has increased four fold since 2009 when it was trading around $100 per share. It’s now at $366. It was $257 at the time of this article.